On Thursday, shares of China Medical Technologies (CMEDY.PK) were up nearly 15% on the heels of two articles by Adam Gefvert, available here and here. Gefvert followed them up with the two StockTalks "CMEDY.PK is taking itself private via a 3rd party. It could reach $4.50 tomorrow now that the cat is out of the bag" and "Correction: it could reach $5.00 a share."
In our opinion, Gevfert's posts were deeply flawed and nonsensical, and we think the rise in CMED shares was completely unjustified.
First, let's review the publicly available facts on CMED. On December 15, 2011, CMED skipped its coupon payment, did not disclose it via an SEC filing, and did not make the payment by its January 15, 2012 grace period. In February, it skipped its next coupon payment. Its director Lawrence Crum resigned in December 2011 and, again, CMED didn't bother to disclose it. The company's stock was halted on February 7, and then de-listed a mere three weeks later on February 28. The very short timeframe between halt and de-listing implies that CMED never disputed the halting, nor cared. A bondholder committee has tried to reach out to the company to negotiate, but there have been no updates since CMED's original December 13, 2011 filing announcing its desire to restructure its debt despite supposedly having more than $200 million of cash. Its bonds continue to trade between 20 and 40, implying severe distress and a lack of progress in negotiations.
In short, we've seen no news whatsoever to make us think twice about our earlier suggestion that China Medical has gotten tired of being a public U.S.-listed company and is pursuing a management take-private at zero dollars per share.
Next, let's review Gefvert's absurd propositions.
Gefvert's article begins:
Although I had written a report today saying I wasn't sure what was going on, it suddenly hit me. China Medical Technologies (CMEDY.PK) is taking itself private via a 3rd party! They are using AER Advisors to do it.
AER Advisors is a registered investment advisor whose website is available at www.aeradvisors.com. Based on our viewing of the site, AER appears to be a small-town financial advisor that manages a variety of ETFs, separately managed accounts and custom portfolios. Here is an excerpt from their FAQ page in response to "Who is AER Advisors?":
AER Advisors, U.S. registered investment advisor, is a private financial services firm located in North Hampton, NH, co-founded by President, Carol O'Leary and Chief Investment Officer David O'Leary. The firm was founded to utilize the unique stock screening methodology developed by Mr. O'Leary in a variety of formats. This research formula has been widely recognized and used by the institutional investment community as a valuable research tool for nearly 15 years. The firm manages two actively managed equity exchange-traded funds, (ETFs) in the U.S., traded on the NYSE. The ETFs are based on a flexible universe of over 3,000 U.S. exchange listed stocks and attempt to outperform traditional index ETFs. AER Advisors provides advisory services to Separately Managed Accounts (SMA) for banks, institutions, other RIA's and high net worth individuals, while continuing to offer institutional research to mutual funds and hedge funds.
We're sure the professionals at AER are fine people, and have developed an excellent stock selection methodology to generate attractive returns for their investors. We don't, however, think that Carol O'Leary is the up-and-coming Carl Icahn of China, or is in cahoots with CMED Chairman Wu Xiaodong to circumvent SEC insider holding disclosure laws to buy shares on his behalf.
Frankly, we're not sure what Gefvert means when he says CMED is "taking itself private via a 3rd party" and is "using AER Advisors to do it." We doubt he even knows what he means. Is he saying that AER is planning to launch a takeover of the company and then seize the assets in China? Is he saying that AER is planning to take the company private and then flip ownership to CMED management for a profit or fee? Is he saying that CMED management has raided the AER headquarters in North Hampton, New Hampshire and is now using AER as a proxy to re-acquire full control of their own Chinese company?
Did Tianfu Yang take Harbin Electric private through a Fidelity mutual fund? Did Guoshen Tu take China Security and Surveillance private through a T Rowe Price high yield bond ETF? Is Gefvert's theory anything short of utter gibberish?
We have no idea why AER Advisors has been increasing its stake in CMED, and don't care. The likeliest answer to us is that they are converting convertible notes to shares so that they can sell out of CMED, but that's mere conjecture. More importantly, we're not in the business of tracking every buyer and seller of stocks that we have positions in, and if we at Kerrisdale ever make investment decisions based on the 13G filings of a random RIA ETF specialist, I ask that I be banned from the securities industry. We have our own unique stock screening methodology, and it involves shorting stocks that default on their coupon payments, don't disclose it in SEC filings, don't disclose director resignations, are de-listed from major exchanges without appealing, and yet are trading at $100m market capitalizations.
Ever since we began shorting Chinese reverse merger companies in early 2010, we've seen lots of nonsense in this sector. Gefvert's articles on Thursday rank up there with Sean Wright's "China-Biotics: Your Next 5x Investment" or Glen Bradford's "CCME: Cash is Real, Company is Real". We believe that followers of Gefvert's advice on CMED will end up much the same as investors of CHBT and CCME.
Additional disclosure: I am short and own options on CMED and stand to realize gains in the event that the price of the stock declines. I am also short CHBT.PK. To the best of my knowledge, all information in this article is accurate and reliable, but I present the information "as is". I will not necessarily update or supplement this article in the future. Following publication, I may transact in securities of the company covered herein.